US economic slump may hit Indian IT companies

indica News Bureau –

With the US economy flashing warning signs of an impending slowdown, experts worry that Fortune 1000 companies may snip spending on technology, affecting the outsourcing business of Indian IT companies like TCS, Infosys and Wipro.

Trade conflict with China and falling equity prices have taken a toll on the economy with US manufacturers reporting the broadest slowdown in growth last month.

Reports say that major US equity indices have been trending lower for months, suggesting investors were anxious about the earnings outlook.

Goldman Sachs expects the US to slow down to less than 2 percent by the end of this year, as a result of which one can see the market getting quite scared.

While Goldman Sachs is optimistic of the economy’s soft landing, a Duke University survey of US CFOs in December said that nearly half the chief financial officers expected the country to hit a recession by end-2019.

Indian outsourcing business has reached an annual level of $ 167 billion.

According to Rishad Premji, Chairman of Nasscom Group of IT companies, if there is a sudden change in the world’s biggest economy, then it definitely has a bearing on the digital companies, and this impact on the performance of Indian IT companies can be seen only after a few months.

“If the economies of the world are going to suddenly change in terms of their performance, it will certainly have a bearing on enterprises and, as a consequence, on technology companies. I can see that correlation translate at some level,” Nasscom chairman Rishad Premji told The Mint.

The Fortune 1000 companies use data analytics platforms offered by the IT vendors to run their business better.

Digital services, which include data crunching and artificial intelligence powered platforms, account for less than a third of overall revenue at each of these companies, and that explains why any slowdown in the US will hurt growth at these companies, according to a Mint report.

For companies, including TCS, Wipro, Tech Mahindra, Infosys and HCL Technologies, US accounts for bulk of business between 55% and 70%.

These firms have been the biggest beneficiaries in the last two recessions as US companies outsourced work offshore for costs. The first six months of the current fiscal saw Indian IT companies adding more employees and raising salaries of some of them by as much as 40%.

As a consequence, global rivals like IBM and Capgemini began to replicate the business model of these Indian firms by ramping up their workforce significantly in India.

TCS is expected to report double-digit growth this fiscal year and the next on the back of multibillion-dollar orders. The Mumbai-based firm has won three mega deals since December, bringing in a combined $5.6 billion in revenue. Recently, Bengaluru-based Wipro won its largest contract valued at $1.6 billion.

But slow US economic growth is likely to derail the progress witnessed in the IT outsourcing industry in the past 12 months

According to brokerage houses, Indian software companies are expected to continue to do well in December quarter driven by consistent growth in US business and BFSI segment, and rupee depreciation.

But the only risk, according to them, is a slowdown in the US economy.

Experts say that FY19 guidance by Infosys and HCL Technologies, and next quarter guidance by Wipro will be the key metrics to watch out for.